Calculate the present value of a stock if this stock is expected to pay $10.60 dividend...

Calculate the present value of a stock if this stock is expected to pay $10.60 dividend in the next three years and then $15 for year 4 to year 6, and in year 7 and thereafter it pays $20 constant dividend forever. Assume investors opportunity cost of investment is 10%. provide excel formula in your answer and briefly explain the steps in your calculations

Solutions

Expert Solution

First stream is 10.60 for year 1,2,3
Second stream is 15 for year 4,5,6
Third stream is 20 for year 7,8....

Value at t=0 first stream=Present value of ordinary annuity=PV(10%,3,-10.60)=26.36

Value at t=3 for second stream=Present value of ordinary annuity=PV(10%,3,-15)=37.30

Value at t=0 for second stream=Present value of future lumpsum=PV(10%,3,0,-37.30)=28.02

Value at t=6 for third stream=Present Value of perpetuity=Amount/rate=20/10%=200.00

Value at t=0 for third stream=Present value of future lumpsum=PV(10%,6,0,-200)=112.89

Total Present Value=PV(10%,3,-10.60)+PV(10%,3,0,-PV(10%,3,-15))+PV(10%,6,0,-20/10%)=167.28

jeff jeffy answered 1 year ago

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